Emotions, Fees Play Major Roles For Individual Investors

Over the last few weeks, NPR's Uri Berliner has been taking us on an adventure in personal finance. It's a series we've called Dollar for Dollar. Uri took money from his savings account that was losing value to inflation, and he sought out different sorts of investments. He joins us now to talk about the project. Uri, thanks for coming by.

URI BERLINER, BYLINE: Hi, David. Sure thing.

GREENE: So, remind us what you did, and why exactly you did it.

BERLINER: Well, as you said, I had this money in savings that was dwindling away. I was in the same boat that a lot of Americans are in who have their money in savings, where the interest rates are below 1 percent, well below the rate of inflation. So you are losing a bit of money by keeping your money in that savings account. So I decided to take it out for a spin and see if I could put it to work - not as the financial guru or an expert, but someone who could tell stories about these various kind of investments, like investing in the stock market, real estate, or even buying a painting online.

GREENE: So what was your takeaway?

BERLINER: I think my big takeaway was I expected this really to be about crunching numbers and looking at financial statements. And I found it was a lot more about emotions, understanding my emotions, and also understanding the limits of my own knowledge. You know, we tend to get very excited about a hot stock or a hot mutual fund, and it's fun and exciting and think we can pick a winner. And that's very natural. But it also makes sense to step back and say to yourself: Am I really going to be able to pick a winner? Why do I think I have this knowledge that tens of thousands of financial professionals don't? Is that really realistic? And, in my case, I said to myself: You know, it's not. And, to me, this was important, because there's a lot of data out there that shows that people who trade a lot or put their money in actively managed funds do worse than people who just invest passively through index funds.

GREENE: I want to sort out a couple of terms there: actively managed mutual funds. This is where it's - you're actually working with a fund manager, looking for the right stock that could get you a lot of money quickly. You're saying that that actually turns out to be dangerous.

BERLINER: It can be, certainly, because these actively managed funds have managers, as you said, and they charge fees for that research to pick these stock winners. And those fees can really add up over the course of an investing lifetime. If you're in an actively managed fund that charges, like, 1 percent a year over the course of 20 years or more, that can add up to tens of thousands of dollars.

GREENE: OK. So, you said control your emotions, don't be tempted to work with these active funds that have higher fees but might pick winners and maybe focus more on these more boring index funds. But you also talked about emotion when it comes to an investment like a painting. I found this really interesting, because you said you buy something, you hang it on your wall, there's value in an investment like that.

BERLINER: Right. What I discovered is, to me, there are two very different kinds of investments. There was investing in equities in the stock market - the kind of thing you might do for your retirement, which I think should be strictly business. If you have some money left over that's not essential for your retirement or your kids' college, it's another kind of investment where you personal stake in it. And, to me, I picked a painting. I saw a painting online. I liked it. I enjoyed the way it looked, and I bought it.

GREENE: An artist in Lithuania, right?

BERLINER: Yeah. It was a guy in Vilnius, Lithuania. I saw his painting online, and it's one of the wonders of the Internet, that you can connect with an artist in Lithuania. So I bought it. You know, it could be a financial investment. It could turn out to become more valuable over time. But if not, that's fine. It's there on the wall of my house, and I enjoy it every day.

GREENE: OK. Let's talk about your portfolio, if we call it that. How did you do with these $5,000 and the investments that you made?

BERLINER: So far, it's totally a mixed bag. You know, I bought funds for real estate and various kinds of stock indexes. Some are up, and some are down. The painting, you know, it's way too early to say. I could have it appraised in a while, and we'll see how I do. Maybe a year from now, we should get back together and see how everything's doing.

GREENE: It's a date. I'm ready to do it.

BERLINER: All right.

GREENE: The series is called Dollar for Dollar. Uri Berliner bought it to us, and he was here to discuss it. Thanks for coming in, Uri.